Commercial banks’ lending to the agriculture sector has surged, but that to hydropower sector is still on the lower side.

As of the 11th month of the last fiscal year, banks’ lending to agriculture sector reached 6.16 per cent of their total credit portfolio, while the credit to the hydropower sector stood at just 2.13 per cent, according to the Nepal Rastra Bank (NRB).

The central bank has told commercial banks to increase their lending to these two sectors to at least 12 per cent of their total credit disbursement by the end of the current fiscal year 2014-15.

The central bank, however, has not set the exact ratio between the lending to these sectors.

The banks have also been directed to boost lending to the productive sector to 20 per cent by the year-end.

Banks’ lending to the agriculture sector, as of the 11th month of the last fiscal year, reached 49.47 billion Nepalese rupees (US$512,600 million)— up 24.4 per cent year-on-year.

The central bank, however, did not reveal the size of the loans going to the hydropower sector.

Bankers said increased investment in agriculture compared to hydropower was “natural” given expanded scope in the farm sector.

Sanima Bank CEO Bhuvan Kumar Dahal said the credit demand from the hydropower is still low, while there are many borrowers in the agriculture sector.

“As the country generates less than 1,000MW hydropower and big projects have not come, chances for the sector getting more loans than agriculture are slim,” he said.

The country’s installed hydropower capacity currently stands at just 767MW, and the government aims at increasing the capacity by just 28MW this year.

And, commercial banks have not financed big projects like the 456MW Upper Tamakoshi, but institutions like Employees Provident Fund and Citizen Investment Trust.

“Even smaller projects, to which banks have issued loans, are facing problems related to transmission lines and land acquisition,” said Dahal.

Until a few years ago, before the central bank’s compulsory provision, the banks were reluctant to invest in agriculture.

Until fiscal year 2010-11, banks’ lending to the farm sector stood at just 2.7 per cent of their total lending, according to the NRB.

It was in fiscal 1992-93 when the sector received the highest percentage of lending from banks (24.8 per cent), after which it continued to plunge.

However, with successive governments prioritising the farm sector, lending has risen of late.

Subsidy to the sector has also been hiked, as more than 60 per cent of the budget allocated to agriculture development ministry goes for the purpose.

The central bank has adopted a policy to facilitate agriculture lending and has made available refinance facility to the banks too.

“Increased focus on the agriculture sector by both government and the central bank has helped boost lending,” said Himalayan Bank CEO Ashoke Rana.

“With agriculture insurance also getting the government’s priority, risks to the banks will reduce.”

On the other hand, Rana sees increased problems in hydropower investment.

“Nepal Electricity Authority (NEA) is not signing power purchase agreements, transmissions lines are not completing timely and many projects developed by independent power producers too are facing problems of cost overrun, which are risks to lenders,” said Rana.

The lack of human resources with technical expertise on the hydropower sector is also making banks fearful for investing in hydropower.

“The banks will be assured about loan repayment if they could themselves confirm the viability of the projects,” he said.